Their were two classes of investors that have been hit hard since 2008: passive investors who couldn’t wade into the arcana that animates professional-institutional investment banks and yuan forecasters. Their uncertainty reflected policy failure on behalf of the Obama Presidency job performance. What rankled yuan forecasters was the pace, timing and direction of yuan depreciation. Because the Chinese government exercised so much authority over its political economy, everyone assumed the benevolence of Beijing’s handling, but the new exchange rate regime introduced last year accomplished two goals: one, it made the yuan more flexible, having tied it to a crawling peg/band, the yuan became stabilized in its downward trajectory; second, China’s bid to acquire reserve currency status meant that Beijing had to accept political uncertanity by responding to global market trends.
Here’s the good news: Beijing wants orderly depreciation. The kind of order the boys in Beijing want is evidenced in capital controls and official restraints on foreign ownership of domestic companies. This isn’t liberalization, its a quiet panic. The future of the yuan will NOT be decided by formal institutions, it will be decided by performance. If Beijing wants out of the middle income trap, it must restrain market movements while guiding the yuan downward. This will happen while its central bank burns through reserves. The Communists in Beijing have openly and covertly threatened the offshore market build up of large short positioning in the attempt to sustain a currency rout. So far Beijing is winning the small wars of its currency movement. But it has come at a domestic cost.
Xi and the central bank have aggressively moved against open capital movements, it has imposed strict controls of money leaving the country, disciplined Hong Kong while imposing limits on foreign investments abroad. Many Chinese companies openly sought foreign acquisitions to mask outflows. They’ve been shut down.
What ordinary investors should watch are Chinese trading volumes in the onshore domestic market, what you’ll find is aggressive, concealed intervention. The authoritarians seek a win.
To be fair, China doesn’t have any real good options. It cannot create a rout by staging a fast depreciation; it cannot sell off a large one-time devaluation nor can it damage Beijing’s social standing among its citizenry with overtly harsh capital controls, effectively closing it off from the world. Beijing needs market signals, it just wants to control the tenor and pace of the market. What Beijing really needs is a weak dollar.
They won’t get it.